Market Rotation Lifts U.S. Stocks to Record Highs as Tech Falters Amid AI Concerns

Gerik

Summary:

The S&P 500 and Dow Jones surged to new highs as investors rotated out of tech stocks into financials and broader sectors, reflecting optimism about the U.S. economy and the Federal Reserve’s recent rate cut...

Broad Rally Masks AI-Driven Weakness in Tech Sector

U.S. equities continued their upward trajectory Thursday, with the S&P 500 and Dow Jones Industrial Average both closing at all-time highs. The Russell 2000 also reached a new peak, buoyed by the Federal Reserve’s quarter-point rate cut on Wednesday, which signaled a more supportive stance for future growth.

However, the market’s overall optimism masked growing investor unease in the technology sector. The Nasdaq Composite fell 0.25%, dragged lower by Oracle’s nearly 11% plunge following a weak earnings report. Oracle’s disappointing results marked by sluggish revenue, increased capital spending, and long-term lease obligations sparked a broader retreat from AI-exposed names such as Nvidia and Micron.

Broadcom Beats Expectations but Fails to Soothe Concerns

Despite reporting better-than-expected fourth-quarter earnings and revenue, Broadcom’s stock dropped 5.17% in after-hours trading. The company revealed that Anthropic, an AI firm backed by Amazon, is now a $10 billion customer, highlighting its growing AI footprint. Yet CEO Hock Tan's failure to ease concerns about Google potentially bringing chip production in-house and ambiguity around its deal with OpenAI sparked investor anxiety.

Rising memory costs also weighed on sentiment, raising doubts about Broadcom’s ability to sustain margins in 2026. These concerns highlight a broader trend: while AI remains a core investment theme, markets are beginning to scrutinize whether inflated valuations and partnership headlines translate into durable, profitable growth.

Rotation Into Financials, Cyclicals Suggests Economic Confidence

While tech stumbled, other sectors showed strength. The S&P 500 financials sector hit a new record, supported by solid gains in Visa and Mastercard. This rotation suggests investors are hedging exposure to high-growth tech and redirecting capital into areas seen as benefiting from economic resilience and rate normalization.

The market’s breadth reflects a wider confidence in the U.S. economy, which appears poised for a soft landing. Fed officials reinforced this outlook during their Wednesday meeting, signaling rate support amid cooling inflation. As long as no macroeconomic shock occurs, markets look set for a positive end to the year.

Corporate Highlights Reflect Shifting Industry Landscapes

Disney made headlines with a $1 billion investment in OpenAI, also granting its characters to OpenAI’s video generator, Sora. CEO Bob Iger framed the move as both strategic and future-oriented, as the entertainment giant seeks relevance in a rapidly evolving content economy shaped by generative AI.

Meanwhile, Reddit has filed a legal challenge against Australia’s new ban on social media for users under 16, arguing the policy violates the country’s implied freedom of political communication. The case could test the boundaries of digital rights and regulatory authority in a post-platform era.

Oracle’s future trajectory remains under review. After its disappointing quarter, analysts are reevaluating price targets, with some warning that high capital expenditures and vague AI narratives may continue to weigh on investor confidence unless clarity improves.

Geopolitics: U.S. National Security Strategy Jolts Europe

In the background, geopolitics remains a critical force shaping market risk. Former CIA director and U.S. Army General David Petraeus commented on the White House’s recent national security strategy, which sparked anxiety across Europe by warning of “civilizational erasure.” Petraeus defended the strategy, suggesting that it was a necessary wake-up call to galvanize European defense commitments something successive U.S. administrations have sought without lasting success.

This broader strategic rhetoric adds another layer of complexity to global markets, particularly for investors watching defense budgets, U.S.-Europe trade dynamics, and the positioning of American influence in a multipolar world.

Year-End Rally Driven by Sector Rotation, Not AI Euphoria

The December market rally reflects growing optimism about economic conditions and the benefits of monetary easing. However, the shine is coming off some of the AI narrative as investors recalibrate expectations and shift funds into more stable, earnings-driven sectors like financials.

This sectoral rotation suggests a more balanced rally than what was seen earlier in the year. As investors look ahead to 2026, they are likely to favor fundamentals and earnings quality over hype especially in the AI and tech space. For now, broad market strength remains intact, but it is no longer being led by the same names that drove early 2025 gains.

Source: CNBC

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